NEW DELHI: Petroleum products, including crude and some intermediate products, could be taxed under the proposed goods and services tax (GST), a move that will reduce the imperfections in the new levy and also narrow the inflationary impact of the tax.

A proposal favouring imposition of a modest tax on these products is being examined and is expected to be taken up by the newly constituted GST Council where the government will try and convince states of its merit.

The idea is to have some minimal tax of about 2-3 per cent so that seamless flow of credit is not broken and cascading is removed.

These products are at present proposed to be covered within the GST but zero rated till the time the council decides to impose a tax. States will continue to have freedom to levy local sales tax on it.

States have been opposed to a change in tax regime for petroleum goods, an easy way of quickly mopping up revenues if needed. But now thinking has veered around to having some minimal tax from the beginning as it could help in bringing down the overall tax rate and allow the industry to get credit.

The Arvind Subramanian committee has recommended a standard GST rate of around 18 per cent. There are concerns GST could stoke inflation. ET had reported some policymakers are in favour of rate as low as 16 per cent.

Tax at marginal rate would not hurt consumers much but will benefit industry in a big way.

“If the petroleum products are taxed at a GST rate which is equivalent to the input GST cost, the cascading of taxes would be mitigated and the final price of the products may reduce,” said Bipin Sapra, partner, EY.

Credits to power, airlines sectors

Sapra said this will allow some credits to the sectors such as power, airlines, transport of goods and passengers, which will help in reducing the cost of these services. “There have been discussions on having some tax on petroleum products…,” said a government official, adding that the final decision would rest with the GST Council.

This would be in addition to local state sales tax on these products. “This would reduce cascading to some extent and allow for some flow of credit,” the official added. The committee headed by Chief Economic Adviser Arvind Subramanian, which had suggested revenue neutral rate in the 15-15.5per cent range with a lower rate of 12per cent anda standard rate of 18 per cent, had said its inclusion could make the industry more competitive.

“Bringing electricity and petroleum within the scope of the GST could make Indian manufacturing more competitive,” the report had said.

The government has put implementation of GST, which seeks to replace plethora of central taxes including excise duty, service tax, cesses and state taxes such as value-added tax, octroi, entry tax with a single levy, on fast track and the newly set up GST Council will meet later this month to take a call on crucial issues.

Prime Minister Narendra Modi will also attend a presentation on the GST framework and issues connected with it on Wednesday.